Here's The Sectors That Will Take Huge Profits Off The Oil Spill

The disaster in the Gulf of Mexico may be the best thing that’s
ever happened to green energy producers in the U.S – but the one
that benefits the most will probably surprise
you.

As the damaged Deepwater Horizon well continues to pump out 5,000
barrels of oil per day into the Gulf, all the major stakeholders
are scrambling to find a way to contain the damage. Investors in
BP, Anadarko, Transocean, and Halliburton have had a rough few
weeks and should be nervous about the future. The growing
political firestorm that’s accompanied this ecological disaster
is drastically reshaping the energy landscape in the U.S. There’s
huge money to be made from the biggest structural change to the
energy markets in the past 50 years, if you know where to
look.

The political and economic fallout from this accident is starting
to take shape, with the executives from BP, Transocean, and
Halliburton being paraded in front of Congress for a public
chastising. Predictably, politicians are making stern promises of
tighter regulations in the future.

At this point, it’s a guessing game as to what the new permanent
regulations will be. So far, a temporary moratorium has been put
in place on the issuance of new offshore oil and gas drilling
permits. In addition, the Department of the Interior plans to
restructure the federal Minerals Management Service (MMS) to
eliminate the conflict of interest inherent in its role of
monitoring safety, managing offshore leasing, and collecting
royalty income.

The Department of the Interior has plans to make offshore
drilling rig inspections much stricter. Interior Secretary Ken
Salazar has also promised tighter environmental restrictions for
onshore as well as offshore exploration and production. Lastly,
in a knee-jerk reaction to the oil spill, the Senate Climate Bill
gives states the right to veto offshore projects within 75 miles
of shore.

Although these regulatory changes aren’t set in stone yet, it’s a
foregone conclusion that any company involved in offshore
drilling will feel some pain. Any exploration and production
company that continues to operate offshore will face reduced
margins from a higher-cost structure from increased taxes,
regulation, and insurance.

Offshore production supplies a large amount of oil and gas to the
U.S. The U.S. Energy Information Agency estimates that U.S.
offshore reserves account for 17% of total U.S. proved reserves
for crude oil, condensate, and natural gas liquids, as the
illustration below shows.

Of the total known U.S. offshore reserves, the Gulf of Mexico
accounts for 90%, with the rest found in California and Alaska.
In 2009, BP produced nearly a quarter of all the Gulf’s oil and
gas located in federal water. Shell and Chevron produced 12% and
11%, respectively.

The sheer size of offshore reserves guarantees exploration and
production will never be completely abandoned in the U.S., but
don’t expect any growth. In fact, the Gulf of Mexico disaster
probably destroyed any hope of any future drilling in
environmentally sensitive areas, like the Arctic National
Wildlife Reserve.

The market has reacted strongly to the spill, punishing the
stocks of every company involved in offshore drilling. Now many
are suggesting it might be an overreaction that could benefit
your investment portfolio if you dare buy in now. However, there
are better ways to work this news to your benefit.

The oil spill will be a very expensive setback for all the
players involved in offshore production; we’ve already seen that
reflected in their stock prices. In the near term, offshore
exploration and production companies and the oil services
companies will show margin erosion as they digest higher costs.
In the medium term, some companies will pull up stakes and move
completely into non-U.S. offshore projects, as they’ll realize
the cost of doing business in the U.S. outweighs any potential
gains.

The market might be overreacting, but we’re not convinced these
depressed stocks represent good value. While it’s
possible there are some good bargains, it’s still too
early to consider speculating in any offshore-related companies.
Specifically, the threat of increased regulation, massive tax
increases, and rising insurance costs will create a hostile
environment for these companies going
forward.

Instead of risking your capital on so many unknowns, a prudent
alternative is to look at energy producers in the renewable
energy sector. The oil spill has only strengthened the current
administration’s resolve to make greener energies supply a larger
chunk of America’s energy needs in lieu of traditional fossil
fuels. Congress is doing its part by giving huge subsidies to
companies in this field.

There are a lot of renewable options that will benefit from the
subsidies and political wrangling, but our current favorite by a
long shot is geothermal power.

Of all the renewables, we think geothermal has the best upside
potential. Based on economics and efficiency alone – unlike wind
and solar energy, geothermal is reliable for round-the-clock
generation and is already price competitive with fossil fuels
without any subsidies – geothermal outperforms competing
renewable technologies.

Add the government subsidies on top of the existing good
economics and the pot gets even sweeter in the short term. Once
the spill is finally contained, attention will shift to
previously low-key renewables, like geothermal, and soon after
the market will recognize geothermal as the clear winner.

We’ve researched companies up and down the geothermal supply
chain and we’re seeing value in a number of quality companies
that we think are poised to outperform. With the coming flood of
money and attention that will be focused on green energy, you’ll
want to move quickly before these bargains go away.